keyforchap6.docVIP

Chapter 11 - Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment Chapter 06 - Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment 11- PAGE 52 11- PAGE 52 Chapter 06 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment Questions for Review of Key Topics Question 06-1 The terms depreciation, depletion, and amortization all refer to the process of allocating the cost of property, plant, and equipment and finite-life intangible assets to periods of use. The only difference between the terms is that they refer to different types of these long-lived assets; depreciation for plant and equipment, depletion for natural resources, and amortization for intangibles. Question 06-2 The term depreciation often is confused with a decline in value or worth of an asset. Depreciation is not measured as decline in value from one period to the next. Instead, it involves the distribution of the cost of an asset, less any anticipated residual value, over the assets estimated useful life in a systematic and rational manner that attempts to match revenues with the use of the asset. Question 06-3 The process of cost allocation for plant and equipment and finite-life intangible assets requires that three factors be established at the time the asset is put into use. These factors are: 1. Service (useful) life — The estimated use that the company expects to receive from the asset. 2. Allocation base — The value of the usefulness that is expected to be consumed. 3. Allocation method — The pattern in which the usefulness is expected to be consumed. Question 06-4 Physical life provides the upper bound for service life. Physical life will vary according to the purpose for which the asset is acquired and the environment in which it is operated. Service life may be less than physical life for several reasons. For example, the expected rate of technological changes may shorten service life. Manag